The use of real options approach in solar photovoltaic literature: A comprehensive review

Abstract

In response to an increasingly competitive electricity market, with photovoltaic (PV) technology costs rapidly decreasing and governments incentivizing the development of renewable energy generation projects, a growing number of academic papers have employed the real options approach (ROA) to planning and evaluating solar PV projects under multiple uncertainties and with integrated flexibility. This paper comprehensively reviews the use of ROA in the PV literature. It identifies the most common types of real options, the main uncertainty sources with their typical mathematical modeling, and the most commonly used option valuation methods. In addition, the 92 papers reviewed are classified into 11 categories according to their area of application: behavior of PV projects under various market conditions, such as subsidies, climate change initiatives, tariff schemes, and technological progress scenarios (37%), PV projects with operational flexibility (12%), PV systems coupled with energy storage systems (12%), evaluation of public policies (7%), and design of power generation portfolios (7%), among others. The results of this research provide an overview of the current state of ROA in the evaluation of PV projects, providing researchers, investors, and policymakers with important insights into the impact of different policies and market conditions on PV projects and their investment timing.